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Employment - Dependent Contractor. McKee v. Reid's Heritage Homes Ltd.
In McKee v. Reid's Heritage Homes Ltd. (Ont CA, 2025) the Ontario Court of Appeal considered the employment law concept of the 'dependent contractor', contrasting the concepts of 'employee' and 'independent contractor':(a) Existence of an Intermediate Category
[24] In 1936, this court recognized the existence of an “intermediate” position “where the relationship of master and servant does not exist but where an agreement to terminate the arrangement upon reasonable notice may be implied”: Carter v. Bell & Sons (Canada) Ltd., 1936 CanLII 75 (ON CA), [1936] O.R. 290, at p. 297. Carter emphasized the permanency of the working relationship between the parties as a determinant in delineating this intermediate category: see Carter at pp. 297-98.
[25] A number of courts in several Canadian jurisdictions have since found such intermediate workers in a number of reasonable notice cases, particularly where the worker is economically dependent on the defendant, generally due to complete exclusivity or a high-level of exclusivity in their work: see, e.g., Marbry Distributors Ltd. v. Avrecan International Inc. (1999), 1999 BCCA 172 (CanLII), 171 D.L.R. (4th) 436 (B.C.C.A.), at paras. 35-38, 46; JKC Enterprises Ltd. v. Woolworth Canada Inc. (1986), 2001 ABQB 791 (CanLII), 300 A.R. 1 (Q.B.); Erb v. Expert Delivery Ltd. (1995), 1995 CanLII 8874 (NB KB), 167 N.B.R. (2d) 113 (Q.B.), at paras. 6-14.
[26] This court impliedly recognized the existence of an intermediate category for work relationships involving a distributorship agreement in Paper Sales Corporation Ltd. v. Miller Bros. Co. (1962) Ltd. (1975), 1975 CanLII 555 (ON CA), 7 O.R. (2d) 460. There, the court upheld, orally, Stark J.’s decision below, which held that a non-employment relationship whereby the plaintiff was “the exclusive distributor of the defendant’s products in [two provinces]” was “closer to a contract of employment than to a commission agency” and thereby required reasonable notice for termination: Paper Sales at pp. 463-64.
[27] Mancino v. Nelson Aggregate Co., [1994] O.J. No. 1559 (C.J. (Gen. Div.)), at paras. 9-13, applied the reasoning in Paper Sales to self-employed truckers, requiring reasonable notice where the work relationship was permanent and exclusive in nature, such that the plaintiff was in a “position of economic dependence”. Mancino thereby exemplifies the applicability, in Ontario, of the intermediate category analysis beyond merely sales or distributorship relationships.
[28] Recently, this court again impliedly recognized the intermediate category where the case required the court to determine the status of a commissioned salesperson. In Braiden v. La-Z-Boy Canada Ltd. (2008), 2008 ONCA 464 (CanLII), 294 D.L.R. (4th) 172, at para. 24, Gillese J.A. noted the trial judge’s suggestion that a “third category of relationship has emerged, between [the employer-employee and independent contractor relationship categories], in which reasonable notice of termination must also be given”, while upholding his conclusion that the plaintiff, Braiden, was nevertheless an employee.
[29] Finally, recognizing an intermediate category based on economic dependency accords with the statutorily provided category of “dependent contractor” in Ontario,[1] which the Labour Relations Act, S.O. 1995, c. 1, Sch. A, s. 1(1), defines as:[A] person, whether or not employed under a contract of employment, and whether or not furnishing tools, vehicles, equipment, machinery, material, or any other thing owned by the dependent contractor, who performs work or services for another person for compensation or reward on such terms and conditions that the dependent contractor is in a position of economic dependence upon, and under an obligation to perform duties for, that person more closely resembling the relationship of an employee than that of an independent contractor. [30] I conclude that an intermediate category exists, which consists, at least, of those non-employment work relationships that exhibit a certain minimum economic dependency, which may be demonstrated by complete or near-complete exclusivity. Workers in this category are known as “dependent contractors” and they are owed reasonable notice upon termination.
(b) Distinguishing between Employees and Dependent Contractors
[31] RHH submits that exclusivity and economic dependence are hallmarks of the dependent contractor relationship, such that although they take a relationship out of the independent contractor category, they do not give rise to an employment relationship. Though I do not disagree with this characterization, it requires some refinement.
[32] Having concluded that there is an intermediate category between independent contractor and employee, namely “dependent contractor”, I also conclude that the legal principles applicable to distinguishing between employee and independent contractors apply equally to the distinction between employees and dependent contractors. In this way, the dependent contractor category arises as a “carve-out” from the non-employment category and does not affect the range of the employment category.
[33] In Braiden, at para. 35, Gillese J.A. employed the general principles for distinguishing between an employee and an independent contractor, as laid out by Juriansz J.A. in Belton v. Liberty Insurance Co. of Canada (2004), 2004 CanLII 6668 (ON CA), 72 O.R. (3d) 81 (C.A.), at para. 11. Had Braiden been a contractor, he would have been a dependent contractor, as he worked exclusively for the defendant, La-Z-Boy: Braiden at para. 35. However, Gillese J.A. did not have to consider what sort of contractor Braiden might be, because she concluded that Braiden was in fact an employee: Braiden at para. 37.
[34] In this way, the proper initial step is to determine whether a worker is a contractor or an employee, for which the Sagaz/Belton analysis, described in the next section, controls. Under that analysis, the exclusivity of the worker is listed as a factor weighing in favour of the employee category (Belton’s first principle). The next step, required only if the first step results in a contractor conclusion, determines whether the contractor is independent or dependent, for which a worker’s exclusivity is determinative, as it demonstrates economic dependence. Therefore, exclusivity might be a “hallmark” of the dependent contractor category vis-à-vis the broader category of contractors. However, it continues also as a factor in determining whether the worker is not a contractor at all, but rather an employee, in the first-step analysis.
[35] This process of analysis serves the policy purposes that underlie the jurisprudence. In summarizing the caselaw, Geoffrey England, Roderick Wood & Innis Christie, Employment Law in Canada, 4th ed. (Markham, Ont.: LexisNexis Canada) vol. 1, at s. 2.33, describes the frequently stated policy reasons for recognizing an intermediate category:These decisions have frequently acknowledged the policy justification for using the “intermediate” status doctrine in order to extend the safeguards of the employment contract to self-employed workers who are subject to relatively high levels of subordination and/or economic dependency, but who, technically, do not qualify as “employees” strict sensu. [36] Given this concern to safeguard workers who are formally “contractors” but who are in a position of economic vulnerability, it only makes sense to carve the dependent contractor category out of the broader existing contractor category and leave the range of the employee category intact. Therefore the appropriate analysis for distinguishing employees from “contractors” generally is the existing analysis for distinguishing employees from independent contractors.
(c) Deference to the Trial Judge
[37] The legal principles to be applied in labelling the status of a work relationship admit of broad discretion to the trier of fact. As the Supreme Court of Canada has recognized, “there is no one conclusive test which can be universally applied”: 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59 (CanLII), [2001] 2 S.C.R. 983, at para. 46. Instead, Major J. stated, at para. 45, that “what must always occur is a search for the total relationship of the parties.” He then approvingly quoted MacGuigan J.A. in Wiebe Door Services Ltd. v. M.N.R., 1986 CanLII 6775 (FCA), [1986] 3 F.C. 553, at p. 563:The most that can profitably be done is to examine all the possible factors which have been referred to in these cases as bearing on the nature of the relationship between the parties concerned.... [N]o magic formula can be propounded for determining which factors should, in any given case, be treated as the determining ones. [38] In my opinion, this language endorses a case-specific, discretionary analysis. Such analyses are best left to the trier of fact, who is closest to the facts of the case and has the best handle on the true nature of the work relationship. More specifically, the trier of fact is best equipped to settle the “central question” based on the balance of factors put forth in Sagaz at para. 47:The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account. In making this determination, the level of control the employer has over the worker's activities will always be a factor. However, other factors to consider include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker's opportunity for profit in the performance of his or her tasks. [39] In Belton, Juriansz J.A., writing on behalf of the court, upheld the use of the following five principles, modelled on the Sagaz factors, at paras. 11, 15:1. Whether or not the agent was limited exclusively to the service of the principal;
2. Whether or not the agent is subject to the control of the principal, not only as to the product sold, but also as to when, where and how it is sold;
3. Whether or not the agent has an investment or interest in what are characterized as the “tools” relating to his service;
4. Whether or not the agent has undertaken any risk in the business sense or, alternatively, has any expectation of profit associated with the delivery of his service as distinct from a fixed commission;
5. Whether or not the activity of the agent is part of the business organization of the principal for which he works. In other words, whose business is it? [40] In the present case, the trial judge reviewed the Sagaz balancing inquiry. Although he did not explicitly reference the five Belton principles, his description of the “established practice” between McKee and RHH was clearly patterned on them:[Principle 1:] [T]here was a tacit agreement, carried out in practice for almost twenty years, that the plaintiff would sell “exclusively” for the defendant. [Principle 2:] The defendant assigned particular subdivisions to the plaintiff, built model homes and told her which lots she could sell. The defendant told her [when she] could sell, and maintained control over how the lots were sold. The defendant set the prices and conditions of sale, and retained the right to set the hours that the model homes were open.... [Principle 3:] [T]he principle tool was the model home – provided by [RHH]. [Principle 4:] The plaintiff here had no risk in the business and was paid on a strictly commission basis. [Principle 5:] Finally, the plaintiff’s activity in the present case is part of the business of the defendant. Selling the homes is the most integral part of the defendant’s business. It is the defendant’s business in which the plaintiff is engaged. [41] Based on this review of the practice, the trial judge held: “I am satisfied that the plaintiff was an ‘employee’ of the defendant when she was terminated in 2005.” The appellant does not challenge the trial judge’s summary of these facts.
[42] Instead, the appellant submits that the trial judge’s error in determining that McKee was an employee was based, in part, on a palpable and overriding factual error in finding that McKee had “a limited freedom to recruit others also to work exclusively for [RHH], but only to the extent that they worked under her and discharged her own sales responsibilities.” For RHH, this limitation actually underscores that she was a dependent contractor, so the trial judge misapprehended the evidence. However, the trial judge does not offer this finding as a factor weighing in favour of employee status, as RHH submits. Instead, he makes this finding in the context of characterizing the work that continued after the 1987 Agreement was “spent”. It continued “pursuant [to] a mutual understanding” or “tacit agreement”. It incorporated elements of the 1987 Agreement, but evolved over the subsequent 18 years in several aspects, such as McKee’s “limited freedom” to hire subagents. Read in context, therefore, this finding was to establish that the 1987 Agreement ended and the ensuing relationship evolved therefrom, and was not material to deciding that McKee was an employee. Therefore, the deference due in this case is not undermined by palpable and overriding factual errors.
[43] As such, I would defer to the trial judge, unless the facts of this case could not support the trial judge’s decision that McKee is an employee under the applicable legal principles.
(d) Employee Determination Defensible under Law
[44] In my opinion, the trial judge’s decision is defensible under the legal principles defining work relationships and the employee category.
[45] Recently, Gillese J.A., writing on behalf of the court, applied the Belton principles in Braiden, at paras. 33-36. She emphasized the fifth principle at para. 34:In many ways, the question posed at the end of the fifth principle -- whose business is it? -- lies at the heart of the matter. Was the individual carrying on business for him or herself or was the individual carrying on the business of the organization from which he or she was receiving compensation? [46] Gillese J.A. considered Braiden’s relationship with La-Z-Boy under each of the principles and concluded that Braiden was an employee: Braiden at para. 35. Her comprehensive consideration of each principle further elucidates their meaning and facilitates application to this case.
[47] On the first principle: McKee, like Braiden, also worked exclusively for the defendant company and the trial judge found that this was pursuant to her implied agreement with RHH.
[48] Second: the trial judge’s findings demonstrate that McKee was, as Gillese J.A. characterized Braiden’s work relationship, subject to the defendant’s control as to “where [s]he was to sell, the promotional methods [s]he was to use, what [s]he was to sell and how much [s]he was to sell it for.” With respect to the promotional methods, the evidence revealed that RHH took advertising responsibilities away from McKee. This is indicative of the sort of specialization of tasks that one expects to find with respect to an in-house agent rather than an independent, or even dependent, realty firm. Gillese J.A. also noted that La-Z-Boy “regularly monitored Mr. Braiden’s sales performance and measured it against the performance of other of La-Z-Boy’s sales agents”. Although the trial judge did not refer to it, there was also evidence in this case that RHH had engaged “professional shoppers” to review the sales performance of McKee’s subagents.
[49] Third: the third principle places McKee’s situation further in favour of employee status than Braiden’s. Gillese J.A. questioned the applicability of the “tools” consideration to the case at hand, but noted, at para. 36: “If ‘tools’ includes anything necessary to perform one’s contractual responsibilities, it would encompass Mr. Braiden’s car and office, both of which he furnished and maintained at his own expense.” McKee, by contrast, performed her sales function in model homes provided by RHH and the evidence indicates that RHH supplied her stationery and forms.
[50] Fourth: McKee, like Braiden, “was financially dependent on [the defendant] and had no expectation that [s]he might earn a profit as distinct from the fixed commissions.” Throughout the contract, McKee’s profit was based on “fixed commissions” from RHH alone. Further, there is no indication that McKee risked any significant capital in her sales operation, given that RHH supplied the necessary facilities and “tools”.
[51] Finally, fifth: although RHH gradually came to make use of other sales services in addition to McKee’s, the evidence suggests that, like Braiden, “the sales force of which [McKee] was a member was a crucial element of [RHH’s] business organization.”
[52] Nevertheless, RHH submits a number of reasons that Braiden should be distinguished. However, I do not find them persuasive.
[53] First, the submission that McKee differs in that Braiden began his work relationship as an employee places the cart before the horse: McKee’s status in her work for RHH since the end of the 1987 Agreement is the issue at hand.
[54] Second, the fact that McKee operated through a business in her work for RHH from the beginning is not determinative of her work status: see Braiden at para. 30; Kordish v. Innotech Multimedia Corp. (1998), 46 C.C.E.L. (2d) 318, at paras. 16-17 (Ont. C.J. (Gen. Div.)), aff’d [2000] O.J. No. 2557 (C.A.).
[55] Third, I am of the opinion that an “employee” can have the intermediary relationship between subordinate staff and higher management that McKee did. As RHH submits, McKee preferred that RHH communicate with “her sales staff” through her. However, this is consistent with certain organizational set-ups where employees who manage certain divisions, such as sales, act as a conductor between higher management and staff within their division.
[56] Finally, it is true that McKee obtained greater profit than a salesperson in Braiden’s situation by employing subagents. However, McKee’s services to RHH included supervision of a subordinate sales staff, for which she received a fixed commission. Therefore, in respect of the facts relevant to principle 4, McKee did not have an “expectation of profit in the delivery of her services” distinct from a “fixed commission”.
[57] As such, I adopt Gillese J.A.’s conclusion in Braiden, at para. 37:Accordingly, I see no basis on which to interfere with the trial judge's determination that the continued relationship between the appellant and [respondent] was that of employer and employee. This determination was based on careful, thorough findings of fact which are fully supported on the record, and was responsive to the issues raised by the parties. Although the reasons do not identify the factors set out above, the findings reflect a consideration of the appropriate factors.
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